In today's economy, stagflation is being discussed more frequently. This is because we are witnessing inflationary pressures in several parts of the world while growth rates stagnate.
Stagflation occurs when high inflation and slow economic growth are combined. This results in a decrease in purchasing power and rising unemployment rates. Such an environment can be difficult for businesses since they must grapple with high costs and low demand.
However, certain stocks tend to do well during periods of stagflation. Here, we will look at some of the best-performing stocks during stagflation periods.
Which sectors and stocks do well in periods of stagflation?
Stagflation is likely to have a different impact on various businesses. When looking for stocks to buy during stagflation, it is important to consider companies that are less likely to be impacted by the decrease in purchasing power. These companies should also be able to benefit from the slow economic growth.
Here are some of the best stocks to buy during periods of stagflation:
Food and beverage companies
Food and beverage companies can increase prices without significantly declining demand. This is because people still need to eat, even during periods of economic hardship. These companies also have low production costs, which gives them a competitive advantage.
Some of the best food and beverage stocks to buy during stagflation include Nestle (NSRGY), Coca-Cola (KO), and PepsiCo (PEP).
Healthcare companies are also relatively immune to the effects of stagflation. This is because people will still need medical care, even when the economy is struggling. Furthermore, healthcare companies have strong balance sheets due to the high barriers to entry in the industry.
Some of the best healthcare stocks to buy during stagflation include Johnson & Johnson (JNJ), Pfizer (PFE), and Merck & Co. (MRK).
Utility companies are seen as defensive stocks since they provide essential services that people need, regardless of the state of the economy. These include electricity, gas, and water. These companies also have stable cash flows and can weather tough economic times.
Some of the best utility stocks to buy during stagflation include American Electric Power (AEP), Duke Energy (DUK), and Southern Company (SO).
Gold miners are another type of stock that does well during periods of stagflation. This is because gold is a safe haven asset and people tend to invest in it when the economy is struggling. Gold prices also rise when inflation is high.
Some of the best gold miners to buy during stagflation include Barrick Gold (ABX), Newmont Mining (NEM), and Goldcorp (GG).
Which sectors and stocks should you avoid during periods of stagflation?
While there are some sectors and stocks that do well during periods of stagflation, there are others that should be avoided. These include companies that rely on consumer spending and those with high production costs.
Some of the sectors and stocks to avoid during stagflation include:
Retail companies are often impacted negatively by periods of stagflation. This is because people have less money to spend when the economy is struggling. Many retail companies also have high production costs, making it difficult to compete when inflation is high.
Banks are another sector that should be avoided during periods of stagflation. This is because the decrease in economic growth typically impacts them. In addition, banks often have to increase interest rates to offset the effects of inflation, which can hurt their profitability.
The Better Investment
While there are some sectors and stocks that do well during periods of stagflation, there are others that should be avoided. Investors need to evaluate the companies they invest in and ensure they are well-positioned to weather tough economic times. This will help them maximize their returns and minimize the risk.
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Alpesh Patel OBE